The December job numbers came in stronger than the roughly 170,000 expected, with payroll increases of 216,000 while unemployment remained at 3.7%. Will there be a soft landing or not? Excellent question. Too bad the answer remains elusive.
At this point in the Federal Reserve's long battle against inflation, markets have been looking forward to what seemed an effective promise of rate relief. In the minutes of the December Federal Open Markets Committee meeting, "participants viewed the policy rate as likely at or near its peak for this tightening cycle, though they noted that the actual policy path will depend on how the economy evolves." Markets have been entranced with the first half of the sentence but have brushed over the second.
Every strong jobs report or upward shift in inflation can contribute toward the "how the economy evolves" concern. It all depends on how the information is interpreted, which comes down to whom you hear.
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Some saw this as good news.
"This month's positive jobs report signals the economy remains strong as we enter the new year, despite high interest rates," wrote Steve Rick, chief economist at TruStage (formerly CUNA Mutual Group), in an emailed commentary. "This, in tandem with easing recession fears, is a welcome sign for American consumers as they look for a more stable economy. The Fed ended the year by holding interest rate hikes for the third consecutive time and penciling in at least three rate cuts in 2024 . This slowdown will hopefully allow for economic volatility to ease in the new year. While the unemployment rate remains below the natural long-run rate of 4.5%, and wage growth runs above its long-run average of 3.5%, the economy is expected to slow in 2024, leading employment to rise closer to about 5% and wages to cool over the next year."
Others were less sanguine.
There was this emailed commentary from Chris Zaccarelli, chief investment officer for Independent Advisor Alliance. "We got a bit of a shocker today with the job market showing much more signs of strength, and not cooling at all," he wrote. "The fact that 216k net jobs were added – versus 175k consensus, and 200k on the high end of what one would expect – shows that the labor market is still really hot. Average hourly earnings are high as well (e.g. 4.1% year-over-year and 0.4% month-over-month) and that is going to add to inflationary pressures."
"Demand for workers, especially within more cyclical sectors, is waning slowly," Nationwide Senior Economist Ben Ayers added in another commentary. "But workers still have the upper hand in the current environment, with strong wage growth and plenty of job opportunities. Unfortunately, this creates further upside risk for service costs and makes the Fed's inflation reduction goals that much harder to achieve."
At this point, short of a crystal ball, what will happen is anyone's guess. But it's probably best not to plan on the optimistic upside as the only possible short-term future. The last decade and more has shown that the economy is more than capable of delivering one surprise, good or bad, after another.
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